Credit Policy 2004: Full text

MUMBAI: Following is the text of the Reserve Bank of India's mid-year review of its monetary policy for the year to March 2005.

Statement by Y Venugopal Reddy, Governor, Reserve Bank of India on Mid-term Review of Annual Policy for the year 2004-05.

1. The policy documents of the Reserve Bank capture the rationale of monetary, structural and prudential measures introduced from time to time against the background of an assessment of macroeconomic and monetary developments. In the process, the approach of greater transparency and better communication contributes towards an effective consultation process in policy making.

This Statement on Mid-term Review of the Annual Policy for the year 2004-05 follows the pattern already set in the previous years. It consists of three parts: (I) Mid-term Review of Macroeconomic and Monetary Developments in 2004-05; (II) Stance of Monetary Policy for the Second Half of 2004-05; and (III) Financial Sector Reforms and Monetary Policy Measures.

2.The annual policy Statement released on May 18, 2004 projected real GDP growth for 2004-05 in the range of 6.5-7.0 per cent on the assumption of normal monsoon, sustained growth of the industrial sector and good performance of exports. As per the India Meteorological Department (IMD), the South-West monsoon rainfall has been 87 per cent of its long period average. Rainfall was normal in 23 out of 36 meteorological sub-divisions of the country, but it was deficient in the remaining 13 sub-divisions. Output of major Kharif crops this year may be lower than their corresponding levels last year. It is, however, anticipated that Rabi crops would be favourable. While the prospects are still somewhat unclear, the current assessments clearly indicate that agricultural growth of 3.0 per cent, projected earlier, will not materialise.

3.There are indications that the prospects for growth in industrial output have improved. The index of industrial production (IIP) increased by 7.9 per cent during April-August 2004 as compared with the increase of 5.9 per cent in the corresponding period of the previous year. There are signs of sustained growth in the production of basic goods, capital goods, intermediate goods and consumer durables. The index of six major infrastructure industries increased by 5.6 per cent during April-August 2004 as compared with the increase of 4.2 per cent in the corresponding period of the previous year. Further, India's exports continue to remain buoyant. Exports increased by 24.4 per cent in US dollar terms during April-September 2004 as against 8.1 per cent in the corresponding period of the previous year.

4.According to the revised estimates by the Central Statistical Organisation (CSO), real GDP increased by 8.2 per cent during 2003-04 as against 4.0 per cent during 2002-03. The data available for the first quarter of 2004-05 show that real GDP increased by 7.4 per cent as against 5.3 per cent in the first quarter of the previous year. While the CSO estimate of GDP for the first quarter is consistent with the earlier projected growth of 6.5-7.0 per cent for the full fiscal year, the deficient rainfall in some parts of the country and its impact on Kharif crop impart a downward bias to this growth projection. In addition, the higher oil prices tend to have an adverse impact on GDP growth. At the same time, the improved prospects for growth in industrial output and continued buoyancy in exports are likely to have a positive impact on growth. On the whole, while the picture is not very clear, it may be reasonable to place the overall GDP growth for the year 2004-05 in the range of 6.0 to 6.5 per cent as against the earlier expectation of 6.5-7.0 per cent, assuming that the combined downside risks of high and uncertain oil prices, and sudden changes in international liquidity environment remain manageable. India would thus remain among the faster growing economies in the world in 2004-05.

5.Various business expectation surveys including RBI's own assessment point to a reasonable air of optimism regarding growth. The corporate results continue to be good and cash flows so generated may get translated into higher investment. Non-food credit growth remains strong. Private corporate investments are expected to be higher. The overall economic environment remains supportive of investment and capacity building, given the economy's resilience to withstand shocks. While exports of services remain buoyant, there is growing confidence for exporting manufactured goods. There is significant acceleration in international business and investor confidence in India.